JANUARY 09, 2017

By Ranjeet Mahtani, Stella Joseph & Prateek Bansal

THE first compliance event (read as payment date) for online information database access or retrieval services ("OIDAR Services") fell on the 6th of January 2017. This article describes the amendments made to the law, traces its background and analyses salient aspects.

A. Position in law - Prior to and post amendment

In line with the recommendations made in the Base Erosion and Profit Shifting Project ('BEPS') project Action Plan 1 Addressing the Tax Challenges of the Digital Economy, the Central Government vide Notifications No. 46/2016-ST, 47/2016-ST, 48/2016-ST and 49/2016-ST, (all dated 9th November, 2016) made a series of amendments in relation to online information database access or retrieval services ("OIDAR services"). All Notifications were effective from 1st December 2016. The main effect of these amendments is to bring the OIDAR services provided by foreign service providers to tax. The tax position is summarized here:

# Defined under Rule 2(1)(ccba) of the Service Tax Rules, 1994

$ In view of Rule 9(b) of Place of Provision of Services Rules, 2012, the place of supply is location of service provider and thus such cross border B2B/B2C services provided by a person in non-taxable territory and received by a person in taxable territory were outside the levy of service tax.

B. Analysis of definition of OIDAR services

The definition of OIDAR services, as provided in Rule 2(ccd) of the Service Tax Rules, 1994 ("STR")consists of two parts, the main limb and the inclusive limb; these are analysed here. For a service to qualify within the main clause of the definition, the services should be "essentially automated" and there is to be "minimum human intervention". The main limb of the definition of OIDAR services is similar to the definition of "Electronically Supplied" Services under the European Union VAT rules.

The terms "essentially automated" and "minimal human intervention" have not been defined. As per the dictionary, 'automated' signifies an operation that functions automatically, without continuous inputs from the operator, and the word 'minimal' signifies "least possible, size, amount or degree" and "very minute or slight". In the case of Siemens Ltd. vs. CIT , the Income Tax Appellate Tribunal, in dealing with issue of Tax Deduction at Source on "technical services",held that there is no human intervention where the activity did not require the examination or verification of technical data. By corollary, if there is an examination or verification of technical data by humans, then it can be said that there is human intervention. In CIT vs. Chief Manager, State Bank of India, the Punjab and Haryana High Court held that any technology or machine providing the services which exists only for observing the process, monitoring the machines, preparing the report etc. may be understood to be without much of human interface or intervention. Taking a cue from the above cases, if the activities performed by the foreign service provider are more than merely monitoring these machines or preparing reports, it involves more than "minimum human intervention", thus falls outside the ambit of OIDAR services.

In terms of the settled position in law, a definition, with an inclusive limb extends the scope of the term beyond the meaning in the main/ specific limb of the definition. [Hamdard (Wakf) Laboratories vs. Deputy Labour Commr. and Ors. [(2007) 5 SCC 281], Income Tax Officer, Andhra Pradesh v. Taj Mahal Hotel [(1971) 3 SCC 550]; Black Diamond Beverages and another v. Commercial Tax Officer, Central Section Assessment Wing, Calcutta and others [(1998) 1 SCC 458], Reserve Bank of India and others v. Peerless General Finance and Investment Company Ltd. and another [(1996) 1 SCC 642] refers.]

The definition of OIDAR service thus stands expanded and the scope of the definition covers services which ordinarily do not fall within the main limb of the definition. An activity will also have to be tested for taxability, with reference to the inclusive limb of the definition.

C. Practical aspects

Administrative authority

Vide Notification No. 50/2016-ST dated 22.11.2016 read with Circular (dated 09.11.2016) issued by the Central Board of Excise & Customs ("CBEC"), it has been provided that Large Taxpayer Unit, Bengaluru, India (LTU-Bengaluru) would be the only administrative authority for the purpose of administration of service provider located in non-taxable territory (i.e. outside India) providing cross border OIDAR services provided to non-assessee online recipient in taxable territory.

Registration

Cross border suppliers of services who are liable to pay service tax, have to register with the Service tax Department. By way of facilitation, in case the service provider is represented by authorized person or agent, such person or agent can (at the option of service provider) take registration on behalf of service provider, and comply with all Service tax provisions on behalf of such service provider.

Invoicing

In terms of Rule 4A of the STR, the foreign service providers are required to issue a tax invoice, containing the details as prescribed in the said Rule. In terms of Notification No. 53/2016-ST dated 19.12.2016, such foreign service providers may issue online invoices not authenticated by means of a digital signature for a period upto 31st January, 2017. The tax element is required to be depicted in the invoice. It is noteworthy that at the time of registration, a declaration is to be given to the effect that the service provider would charge Service tax from the individual customers in India and deposit the same with Government of India through internet.

Increase in costs

The amendments will have some impact on the individual consumers in India availing online services from foreign service providers; the cost of accessing online services will increase as the foreign service providers will seek to shift the burden of the indirect tax to its customers. CENVAT Credit will not be available to the service recipient in case of individual customers. Also, the foreign service providers will not be able to take any CENVAT Credit. Besides, the scheme of taxation will subject the overseas entity to the jurisdiction of the Indian tax authorities.

Review of contracts

To ascertain the levy of Service tax on the services provided by the foreign service providers , these foreign entities have to examine the contracts with the Indian customers to ascertain whether the services provided by them are covered within the definition of OIDAR services and determine who is liable to pay tax, and to issue the invoices compatible with the Service tax law. The point of taxation (or 'tax point', as it is called in certain jurisdictions) generally, is earliest of the following three events: issuance of invoice or, receipt of payment or, completion of provision of service. Since OIDAR services have been taxed for the first time in the hands of the foreign service providers, the point of taxation is to be determined in terms of Rule 5 of the Point of Taxation Rules, 2011, i.e. (i) no tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable (before 01.12.2016), (ii) no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within fourteen days of the date when the service is taxed for the first time (before 01.12.2016).

D.  Some points of concern

-  The amendments were made on 9th November, 2016, and effective from 1st December, 2016,therefore, only about three weeks time was allowed to (foreign service providers) modify the systems to enable identification of transactions that are liable and undertake all compliances and start issuing invoices compatible with the Service tax law.

- before providing any service or entering into any service contract with the Indian customers (essentially is the service recipient registered or not) and additionally verify the data / information furnished by the Indian customers. There is no mechanism to verify whether the Service tax registration number furnished by the Indian customer is valid.

- In terms of the last proviso to sub-clause (ii) of clause (d) of Rule 2 of the STR (inserted with effect from 1st December, 2016), a person receiving OIDAR services shall be deemed to be a non-assessee online recipient, if such person does not have Service tax registration under STR.If the Indian customer does not provide details of its service tax registration number (but is registered), the foreign service providers will treat the transactions as one of B2C and apply the tax; Credit may be available though.

- The administration of this scheme of service tax is another important aspect of this scheme. The Circular (dated 09.11.2016) issued by the CBEC talks about the efforts to be made to identify service providers located in non-taxable territory providing cross border B2C OIDAR services in taxable territory by taking help of advertisements of such service providers appearing in newspapers, internet websites, social networking platforms, etc.It will however not be an easy walk for the government to monitor each and every service including all app downloads or digital transactions, and track these for tax payment.

- In case of violation or default, the foreign service providers will be penalized under the provisions of the Finance Act.How the provisions of the Finance Act, 1994 will be implemented/ applied in such cases will have to be seen - the defaulting service providers are in non-taxable territory. Blocking the websites of the defaulting foreign service providers could be a recourse available to the Government.

In view of the above concerns in providing OIDAR services to the Indian customers, the foreign companies may become reluctant in dealing with Indian customers leading to hampering of India's commitment to technological development besides against the ideas of 'Digital India'.

Separately and interestingly, the equalization levy (effective 01.06.2016 at the rate of 6%) is applicable on payments received by a non-resident service provider from an Indian resident or an Indian permanent establishment (PE) of a non-resident in respect of the specified "services". Equalization levy taxes B2B transactions only and the levy of Service tax (@ 15%) on OIDAR services transactions operates simultaneously for B2B and B2C services. It is not clear if the liability to deduct Equalization Levy would be triggered on the value of services alone or on the value of service plus the service tax charged / chargeable. A clarification from the Central Board of Direct Taxes ("CBDT") on this issue (similar to what has been issued in the context of tax deduction at source vide Circular No. 1 of 2014 dated 13.01.2014) would be useful to clarify on this aspect.

India is some months away from the intended 01st April, 2017 dateline to embrace the comprehensive Goods and Services Tax ("GST") which will subsume service tax. The Model GST Laws released by the Government in November 2016 contains provisions which are similar for taxation of OIDAR services. These amendments are perhaps a precursor to the GST regime, though the reason to introduce these amendments ahead of GST is not forthcoming.

[About the authors - Ranjeet Mahtani, Partner, Stella Joseph, Senior Associate and Prateek Bansal, Associate at Economic Laws Practice (ELP)]